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157-year-old Kansas City Board of Trade heading to Chicago

Updated: 2013-06-25T12:37:02Z

By BEN UNGLESBEE

The Kansas City Star

For more than a century at the Kansas City Board of Trade, bidders yelled, waved their hands, and made and lost fortunes as they bought and sold contracts for one of the world’s most vital commodities: the wheat used to make bread.

Computerized trading has mostly silenced the trading pit. And on Friday, wheat trading in the city will come to an end altogether.

The Kansas City Board of Trade, an institution that grew up with the city and provided it a large measure of wealth, will hear the last call for contracts in its iconic building near the Country Club Plaza.

“We were at one time the center of what made the world have an adequate supply of food, and this is going to be gone now,” said Morton Sosland, editor-in-chief of Sosland Publishing Co., which publishes Milling and Baking News.

Last October, Chicago-based CME Group agreed to purchase the exchange for $126 million. Announcements soon followed that what’s left of face-to-face trading in Kansas City would move to CME’s Chicago floors and that the exchange building was going on the market.

Those changes are here. Next week, the Kansas City exchange heads to its new home in Chicago.

A growing city

and industry

The board began in 1856 as a loosely organized social club and merchant association that pushed for better roads, fire protection, farming on American Indian lands and other issues of interest to the grain industry.

Trading in commodity futures at the board began in 1876 with the first grain call. In its simplest form, a futures contract allows buyers and sellers to specify the quantity, price and delivery date of a trade in advance of the sale. It protects both parties from sudden and potentially ruinous price shifts.

Membership seats at the board could be purchased, giving the member rights to trade at the exchange. In 1875 the highest class of membership went for $20 a year, according to local writer and historian Heather Paxton’s history of the exchange. When CME Group purchased the exchange’s 192 membership seats in December 2012, it paid the equivalent of $656,250 for each seat.

In Kansas City’s early history, the sheer volume of grain changing hands made an exchange like the Board of Trade necessary. Next door in Kansas, wheat production jumped from 168,000 bushels in 1860 to 25 million in 1875.

As Kansas wheat harvests grew, millers and shippers set up shop in Kansas City to cash in on the grain trade. Grain elevators shot up almost overnight on the Missouri River.

This period also saw an influx of Russian Mennonite farmers to the fields of Kansas. The Mennonites brought with them a Turkish variety of hard red winter wheat that would become the board’s central commodity.

Hard red winter is the world’s bread-making wheat. It’s a hardy crop, resistant to drought, heat, freezes and frosts. Kansas has plenty of all those, and the hard red’s tenacity has made it one of the few cash crops that can flourish in the state.

Financial hub

With much of the hard red winter wheat trade passing through the Kansas City exchange, it became one of the country’s largest financial markets.

“So much of the wealth and prosperity of the city, at least in the 20th century, came from people associated and involved with this market,” said Michael Braude, who oversaw the board from 1984 to 2000.

Commerce Bank, for example, prospered in part because of the exchange. The bank started out as a creditor and depositor for grain companies, and the board itself was one of Commerce’s most important accounts — one that Kevin Barth, president of Commerce’s Kansas City division, said he would miss when it left for Chicago.

Several prominent Kansas City families have made fortunes in wheat trading at the exchange, including John A. Theis and Paul D. Bartlett, who both started families of wheat traders that spanned more than four generations. W.T. Kemper, who was chairman of Commerce Trust Co., was one of the exchange’s early presidents.

Those who succeeded in trading on the exchange put money back into the city, Barth said.

“They ended up being some of the major investors in a lot of real estate projects,” he said. “There’s a lot of wealth that poured into Kansas City because of the Board of Trade.”

As the board itself grew and prospered, it changed locations and upgraded its facilities. It moved from Eighth and Wyandotte streets to larger offices at 10th Street and Wyandotte. In 1966 it left downtown and moved to its current location at 4800 Main St., near the Plaza.

The exchange prospered because of its practical relevance to the wheat market. For buyers and sellers it has always served two essential functions: price discovery and risk hedging.

This means farmers, millers, grain elevator operators and investors used Kansas City to determine fair market prices for wheat. Many of the same players also bought and sold futures contracts through the exchange to protect themselves from market swings.

And the Board of Trade saw plenty of swings in its time. Prices rose amidst world wars, droughts and floods. They rode a roller coaster in the 1930s, tumbling with the economy and threats of government intervention in wheat trading, and then darting up during the Dust Bowl.

Prices per bushel shot up by almost $1 in the summer of 1986 as the Chernobyl nuclear plant disaster unfolded in the Soviet Union, another major producer of hard red winter wheat.

In 2008 prices hit almost $14 a bushel, breaking all records and marking a global food crisis. The spike was a frightful reminder of how precious wheat is to the world.

Traders and tricksters

The traders, bankers, exchange employees and visitors from all over the world who witnessed pit trading in its heyday saw a frenetic, noisy crush of people chasing wealth and wrestling with risk.

Shoulder to shoulder in the pit, traders waved their hands and yelled out their bids in what is called “open outcry.”

Competition among traders was loud and fierce. With up to 100 traders in the pit, Braude said, there was “screaming to be heard.”

That noise carried economic value. Being able to hear the voices and see the faces and wild gesticulations of your competitors gives you a window into their intentions.

Of course, it could get personal, too. As traders watched each other for clues to their competitor’s next move, the tension occasionally broke into arguments and even the occasional fistfight.

Traders also played jokes on each other to blow off steam. The Main Street building off the Plaza linked its offices through a network of pneumatic tubes, through which the occasional jokester would send a mouse, caught while eating grain samples, to a neighbor.

Traders could also expect their newspapers occasionally to catch on fire while reading them, their shoes to fill up with water when they weren’t looking and, of course, their phones to ring for prank calls.

Quiet in the pit

Pit trading in Kansas City comes to a formal end on Friday, but it has been winding down for more than five years as electronic trading has come to dominate the industry.

During the four years that Tom Tunnell served as a director at the board, he witnessed the beginnings of the digital revolution. Once the board started searching for a digital platform for trading, everything was set in motion for the switch to digital and the eventual merger with CME.

Today, computers process trading for 87 percent of Kansas City’s hard red winter wheat contracts.

“The place is kind of empty now,” Sosland said.

From today’s vantage, nobody involved with the board is surprised by the drift to electronic trading. But just seven years ago, Jeffrey Borchardt, current exchange president, said the board might withstand the wave of consolidation and digitization transforming the industry. His reasoning was that open outcry is a more transparent trading system.

“The electronic trading world of anonymity is devoid of such information, providing only price transparency and leaving market participants to glean what information they can from select contacts rather than the collective marketplace,” he said.

But even the trading of something as old and fundamental as wheat can’t escape industry sea changes forever. Open outcry is transparent, yes, but electronic trading is unquestionably more efficient.

“Times change, and we had to change with it,” Tunnell said. “It’s the same way the pay phone went. Technology takes over everything.”

Last call

After Friday, trading of the Kansas City hard red winter wheat contract will take place in Chicago, where it can be traded next to contracts for the soft white wheat used in making cakes.

CME will keep “Kansas City” in the name of the hard red winter wheat contract for now. The wheat contract carries powerful name recognition. It also comes with a history that Tim Andriesen, managing director of commodity products at CME Group, said his company respects.

Whether in the years to come the city will remember the exchange that helped build it, or whether commodity traders will remember Kansas City’s impact on their industry — that’s an open question.

“Ten years from now someone could be looking at the name and wonder what … that ‘Kansas City’ is there for,” Sosland said.

As for the trading floor at the Board of Trade, Andriesen said it will remain open for traders who need physical space to place digital trades. Some of the trading and financial firms stationed at the Board of Trade building will follow the exchange to Chicago. Others, such as Sosland, whose company recently signed a long-term lease at the building, will stay as long as they can.

Of the board’s remaining employees, some have already left, some will be invited to Chicago, and some will likely be laid off.

The move to Chicago represents one more transition in the board’s long history of change and adaptation. But this change is different. It marks the end of a part of the city’s history.

Those who were a part of the board in its most energetic and noisy days can’t help but feel some sadness to watch it leave.

“I loved it from the first day,” Braude said. “I loved every minute of it.”

The Star’s Mark Davis contributed to this report.

To reach Ben Unglesbee, call 816-234-4072 or send email to bunglesbee@kcstar.com

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